A new treasurer opens the payroll reports and finds that the pastor's check has no Social Security or Medicare withheld, and maybe no income tax either, while the office administrator's check looks like any other paycheck. Nothing is broken. A minister's pay follows a different set of federal rules, and the payroll setup has to reflect them on purpose rather than by accident.
Two tax statuses at once
The IRS describes what is often called dual tax status. Tax Topic 417 says a licensed, commissioned or ordained minister is generally the common-law employee of the church that employs them, and that a salary paid by a congregation is generally wages for income tax withholding purposes. The same page says the services a minister performs in the exercise of ministry are generally covered by Social Security and Medicare under the self-employment tax system, regardless of the minister's status under the common law.
So one person is usually an employee for income tax and self-employed for Social Security and Medicare, on the same paycheck. Most of what looks odd in church payroll follows from that.
What the church does not withhold
IRS Publication 15-A states that the earnings of a minister are not subject to federal income, Social Security and Medicare tax withholding. In practice:
- No Social Security or Medicare is withheld from pay for ministerial services, and the church does not pay an employer share on it. The minister generally pays self-employment tax on their own return instead, unless the IRS has approved an exemption (Form 4361).
- Income tax withholding is voluntary. Publication 1828 says an employee minister may enter into a voluntary withholding agreement with the church by completing Form W-4. Publication 15-A notes the agreement can be sized to cover the minister's self-employment tax as well as income tax.
- Without withholding, the minister pays as they go. Publication 517 says a minister whose salary isn't subject to withholding may need to make estimated tax payments.
Whether to request withholding is the minister's decision. The church's part is to keep the signed Form W-4 on file and withhold what it says.
Who counts as a minister is not a payroll decision
Everything above applies only to a minister, for ministerial services. Publication 517 describes ministers as individuals duly ordained, commissioned or licensed by a religious body constituting a church or church denomination, with authority to conduct religious worship, perform sacerdotal functions and administer ordinances or sacraments. It adds a further test where a church ordains some people and licenses or commissions others.
Applying that to a youth director, a worship leader or a licensed associate takes judgment about the person's credentials and duties. It is a question for church leadership and the church's CPA, tax adviser or attorney. A bookkeeper should not make that call and should ask for it in writing before setting up the employee.
Non-minister staff are ordinary employees
Publication 1828 says wages paid to employees of churches are generally subject to Social Security and Medicare taxes, with the minister exception above. For the administrator, custodian, nursery staff and musicians who are employees, the church withholds income tax and the employee share of Social Security and Medicare, pays the employer share, and reports on Form 941 each quarter, or on the annual Form 944 if the IRS has told the church to use it. The same publication says churches are not liable for federal unemployment (FUTA) tax. State unemployment and withholding rules vary and should be checked with the state.
Whether a worker is an employee or an independent contractor is a separate question again, decided on the facts under the common-law rules in Publication 15-A. It is also one for the tax adviser.
The Form 8274 election
Some churches have a second layer. A church or qualified church-controlled organization that is opposed for religious reasons to paying Social Security and Medicare taxes may elect exemption from the employer's share by filing Form 8274. According to the form's instructions:
- The election applies to all current and future employees, but not to services as ministers.
- Employees other than ministers who receive wages of $108.28 or more in a year from an electing church are subject to self-employment tax on those earnings.
- The church must continue to withhold federal income tax, issue Forms W-2, and file Form 941 or Form 944.
- It is filed after the church hires employees but before the first date on which an employment tax return is due. A church can revoke the election by paying the taxes, and that revocation is permanent.
A treasurer inheriting the books needs to know whether the election was ever made, because it changes how every non-minister paycheck is set up. Look for a copy of the form in the permanent file and, if there is any doubt, ask the CPA to confirm.
What the minister's W-2 shows
For a minister who is an employee, Publication 15-A describes the Form W-2 this way:
- Box 1: taxable compensation, not including a designated housing allowance
- Box 2: federal income tax withheld, if there is a voluntary withholding agreement
- No amounts shown as Social Security or Medicare wages or tax
- The housing allowance may be reported in box 14 (labeled 14a on the 2026 form) or in a separate statement
The W-2 instructions give February 1, 2027 as the date for furnishing 2026 Forms W-2 to employees and filing them with the Social Security Administration. The housing allowance has its own written requirements, covered in what the church has to put in writing.
What the payroll file should hold
- For each minister: the basis for treating them as a minister, as decided by leadership and the tax adviser
- The approved compensation package and the housing allowance designation for each year
- Form W-4 for every employee, including a minister who has asked for voluntary withholding
- A copy of Form 8274 if the church made the election
- Reimbursement records kept apart from pay; see reimbursing church expenses
None of this is tax advice, and a minister's own return is outside bookkeeping. The bookkeeping job is to run payroll the way leadership and the tax adviser have decided, every pay period, and leave a record that shows it. That is the approach described on our church payroll page.
